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The Choice for Silver Dollar in the Currency Reform (1932 - 1933)


 

For a long period of time, China took silver as the nominal currency. Silver taels, which were cast freely among people, were not subject to unified standards in terms of weight, color and exchange rate with other currencies. In 1927, silver taels were measured by as many as 170 monetary units across the country. To monopolize the financial market, the Nationalist Government had to unify the right of currency issuance. And to issue a unified currency, taels had to be abandoned and silver dollars adopted.

Bank of China had long been in favor of the abandoning of taels and the adoption of silver dollars. As early as in November, 1923 when money supply was tight in Shanghai, it suggested to the Inter-bank Association to negotiate with the Money Association to use both taels and silver dollars, but no permission was received from the Money Association.

In July 1932, T.V. Soong, the Financial Minister, and Xu Kan, the Director of the Currency Department, respectively convened representatives of the Silver Association and the Money Association in Shanghai to discuss the issue of taels abandonment. At the meeting, foreign-funded banks and some representatives of the Money Association worried that such outcomes as excessive casting of silver dollars, excessive issuance of banknotes and short supply of silver dollars could occur after the abandonment of taels. In view of that, Bank of China made a public statement promising open check of the reserves for banknote issuance to avoid excessive issuance. Furthermore the enough silver dollar reserve in the treasury relieved the worry of some representatives.

On April 5, 1933, the Ministry of Finance published an announcement requiring silver dollars be used as the sole currency in all corporate and private payments and collections, conclusion of contracts and instruments and all other transactions. After such abandonment-adoption initiative, when the amount of cast silver dollars fell short of supply, Bank of China used to import silver bars and deliver them to the minter to cast silver dollars several times, contributing to the market stabilization.

The act marked a major progress in the Chinese currency history because the unified silver dollar promoted development of domestic capitalist commodity economy. However, problems still existed such as the non-unified subsidiary silver money, domination by imperialist states over the supply of silver for casting and the fluctuation of price. Therefore, a new round of currency reform must be carried out to establish a sound banknote system.

With silver outflow, decline in exchange rate of silver dollar and turmoil of market, the national economy was at the point of collapse. The government made an urgent decision of declaring an emergency order on November 3, 1935 to start currency reform across the country. The Ministry of Finance released a public notice specifying that banknotes issued by the Central Bank, Bank of China and Bank of Communications should be considered as the only legal notes as of November 4, 1935; and all corporate and private payments and collections must be conducted with the legal notes rather than silver dollars, otherwise, the full amount would be confiscated. Furthermore, it informed all provincial governments on November 11, 1935 to stop circulating any cash or notes issued by any provincial banks, and all the new and old notes together with cash reserves and guarantee reserves should be submitted to the local branches of Central Bank, Bank of China and Bank of Communications. Bank of China was responsible for receiving issuance reserves of Ningbo Bank, Farmers Bank of China and China Industrial Bank.

After implementing the legal currency policy, in order to keep the exchange rate of the legal currency at the current level, the Ministry of Finance specified that the Central Bank, Bank of China and Bank of Communications had no limit in purchasing foreign exchange, which made clear that it was the responsibility of the three banks to stabilize the foreign exchange market. In November 1935, foreign exchange fund of the Nationalist Government only amounted to USD 30 million. Thanks to partial sales of the silver reserve to supplement the foreign exchange reserve, exchange rates of the legal currency to foreign currencies were stabilized.

The legal currency policy implemented by the Nationalist Government was another major reform in the Chinese currency history, leading Chinese financial industry to a new stage. Unified currency issuance empowered the country with the right to control currency issuance, hence control of currency circulation and regulation of social finance. After the policy was implemented, cash reserve ratio of most issuing banks exceeded 60% and it was conducive to consolidation of the creditability of the legal currency when banks delivered their issuing reserves to the Central Bank, Bank of China and Bank of Communications for integrated management.

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